Investment: Burying the Corpse

 Search engines have interesting lacunae. One bit of lost knowledge is the [burying the corpse] dynamic in accounting and investing. It comes up often enough that I have to make my own quick reference.

 

 I can gas the price of any financial instrument by buying a lot of it. My earlier purchases will show a gain on paper due to my later purchases. The fact this profit turns into a loss once I try to sell is known as burying the corpse. 

 Even in ideal conditions, in practice if I buy ~75% of a stock and then sell it again, I'll have to sell it back to exactly the folks I bought it from, and I'll have to pay exactly what I bought it for plus pay for their transaction costs. Realistically I can't even get losses that minimal. Basically it happened because I lied. Fictitious demand creates fictitious prices. The demand I hoped to exploit was my own demand, which I created by supplying it, see? Cancels out, plus there's friction.

 I'm supposed to buy things because I think they're worth more than they cost. If I plan to turn around and sell them immediately, that can't be true. Especially if I accept the prevailing prices I'll see.

 I killed the investment when I inflated it, and now I have to bury the corpse.

 

 Naturally this naive clean version almost never happens.

 However, many times folk will spend a lot on an instrument, then simply hold it on their balance sheet as collateral. They're still afflicted by burying the corpse, but the problem is being whitewashed. They're hiding the fact that book value and market value are different by insulating the instrument from the market. This is usually intentional fraud. Banks do this all the time, for example, because they get bailed out via taxes when the market calls their bluff. 

 Likewise I can take out a huge fractional-reserve/counterfeit loan, then buy a ton of some stock or another, then use the inflated book value of that stock to justify a second huge counterfeit loan. Leverage myself twice over. E.g. imagine I buy 90% of the market cap of some penny stock. Wow, hueg gainz. Now I can afford an even bigger second loan, lol.

 By book value I can pay all my debts. It's all fun and games until someone has to bury the corpse. If any of these risks go bad, I find my collateral can't pay for my leverage and in fact I've been underwater this whole time. That penny stock is, in fact, worth pennies. Financial explosion; anyone who trusted me as a risk gets hosed too. 

 It can hose you as an innocent investor too, if you're naive enough to fall for it. When I buy 90% of that penny stock, you might think it's going places and try to get on the bandwagon. You have to do your due diligence, notice all the demand is me and me alone, and realize book value has diverged from market value. Indeed I'm hoping you will fail exactly that: I will sell the corpse to you, pay off my loan with the proceeds, and pocket the profits, leaving you to bury the corpse. Everyone is looking for a rube who didn't buy on leverage (e.g. pension funds), so they can leave them carrying the bag, or else everyone is going to take a haircut.

 Can someone buy private stock, privately? Can they buy it without you knowing who bought it? If so, you have to assume someone now has a corpse to bury. At the very least look into the transaction history and discount price gains from large or repeated transactions.

 I would try short selling, except of course banks can hold corpses on their balance sheets for very long times. The "market" can stay "irrational" longer than I can stay solvent. That's because banks aren't private or market entities, they have legal privileges which make what would be irrational for me into something perfectly rational (if evil and traitorous) for them.